Sunday, November 28, 2010

The Real Adam Smith Still Unknown in Edinburgh

Today’s (28 November) leader in Scotland on Sunday (Edinburgh) (HERE):contains this in a piece on UK Bond markets:

“Break the bonds”

“WHEN Adam Smith wrote about market forces in The Wealth Of Nations he described an investor being "led by an invisible hand to promote an end which was no part of his intention".

Like so much of what Smith said this has often been misinterpreted.

The fundamentalist view of capitalism has it that market forces are a force for good per se, and that even when they appear to be out of control they are not failing, they are merely adjusting and correcting themselves. The market is therefore possessed of its own dynamic, it's own irrefutable logic; the invisible hand belongs to an infallible deity that cannot do wrong.

After the events of the past two years the number of those who still advocate a form of capitalism that is completely unfettered and unregulated has - unsurprisingly - diminished somewhat. The general view is that a framework of control is necessary, if only to save the corporate world from its own misjudgments and excesses. There is too a greater acceptance of the notion that corporations owe a duty to more than just their shareholders - that they also have a wider social responsibility to the societies in which they operate.”

CommentA parody does not a case make (though I wish them luck, expecting as I do that they will be disappointed - the Leviathan of debt, so to speak, is out of the bag). Having correctly recognised that "what Smith said ... has often been misinterpreted" the writr goes on to do exactly that - misrepresent what Smith said.

First of all, Adam Smith was not writing about ‘market forces’ when he made his singular reference to the metaphor of an invisible hand in Book IV of Wealth Of Nations) (he wrote about market forces in Books I and II – the leader writer should know that fact when writing in the city where Adam Smith lived).

By using the modern sounding word ‘investor’, the author creates a false impression about Smith’s topic having relevance to modern corporations and bond markets.

But of even greater importance is the plain fact that Smith referred to another problem, relevant in the 18th century and not as relevant to modern capitalism in the 21st.

He discussed the behaviour of some, but not all merchants, who preferred to invest their capital in ‘domestick’ activity rather than send it abroad to Europe or the North American colonies, which this particular group of men considered to be too risky for their sense of ‘security’ compared to the home trade.

They were, to coin a more modern phrase, more ‘risk averse’ than those merchants who invested abroad. They knew better those potential local partners with whom they were most familiar, they knew the probity of these local men, and ‘should they be deceived’, they had more faith in local courts and their judgements, compared to the habits, probity and courts of distant foreigners, including the colonists.

It was their sense of insecurity that led them to invest locally – his sense of insecurity was the invisible hand, which Smith used metaphorically to illustrate in a ‘more striking and interesting manner’. This is what Smith taught in his lectures on Rhetoric at Glasgow University (and most likely in his Edinburgh public lectures too).

The Leader writer’s description of the “fundamentalist view of capitalism” is accurate, but this had nothing to do with what Adam Smith wrote about in the context of the metaphor of ‘an invisible hand’. That is connected to Adam Smith is a modern and false (‘made up’, ‘invented’ and ‘unfounded’) attribution from the 1950s, of which Samuelson’s description of Smith’s invisible hand in his textbook, Economics (1948, p 36), was the first of many from epigones of epic proportions. It is now believed with almost religious faith by most modern economists – I know; I have had many a joust with some of them.

The Leader writer quotes them: “the invisible hand belongs to an infallible deity that cannot do wrong”, words or ideas that were never expressed by Adam Smith either in Wealth Of Nations or Moral Sentiments.

For Smith, market forces were human in cause and shape. They arose and evolved over many millennia from the pre-historic discovery of the simple trait of the ‘propensity to truck, barter, and exchange’ (Note that he did not mention ‘trade’ in this context). This propensity was long established among humans before commerce brought it to fruition in the North-West corner of Europe from about 300 years ago, having stalled by the fall of the Roman Empire in the 5th century and stagnated in China about the same time.